Government announces $85 billion loan to rescue AIG to stave off further financial turmoil

Staff
AP News

Sep 16, 2008 20:28 EST

In a bid to save financial markets and economy from further turmoil, the U.S. government agreed Tuesday to provide an $85 billion emergency loan to rescue the huge insurer AIG. The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

"The President supports the agreement announced this evening by the Federal Reserve," said White House spokesman Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."

Treasury Secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."

"I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect taxpayers," Paulson said in a statement.

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

Earlier, Fed chairman Bernanke and Paulson met with Sen. Christopher Dodd, D-Conn., Majority Leader Harry Reid, D-Nev., and House Republican leader John Boehner of Ohio, to brief them on the government's option.

"At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters. "The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."

On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent — and another 45 percent after hours. Still, no deal emerged.

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG couldn't make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

The worries were triggered after Moody's Investor Service and Standard and Poor's lowered AIG's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance — such as banks and other financial companies — would have found themselves without protection against losses on the debt they hold.

"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother's failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."

New York-based AIG operates an insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."

Source: AP News

irishjayhawk

09-16-2008, 10:34 PM

I don't get where Bush comes in.

jAZ

09-16-2008, 10:37 PM

I don't get where Bush comes in.

He's the President. In theory, none of this happens without his authorization.

irishjayhawk

09-16-2008, 10:40 PM

You know the keywords to your post, correct?

RealSNR

09-16-2008, 10:42 PM

HA! I wish the president had a say in affairs handled by the Fed.

Or Congress. Or my cat. Or ANYBODY :#

jAZ

09-16-2008, 10:49 PM

You know the keywords to your post, correct?

HA! I wish the president had a say in affairs handled by the Fed.

Or Congress. Or my cat. Or ANYBODY :#
Correct me if I'm wrong, but I don't see how this can be the case...

"...the government will receive a 79.9 percent equity stake in AIG".

...and not have the necessary authorization of the Chief Executive.

Silock

09-16-2008, 11:14 PM

Correct me if I'm wrong, but I don't see how this can be the case...

"...the government will receive a 79.9 percent equity stake in AIG".

...and not have the necessary authorization of the Chief Executive.

It's the Fed doing it. The previous bailouts had to go through Congress via a bill (remember, the President does not make policy). This time, it was the Fed doing it. Now, whether they had to borrow the money from the Treasury to do that, I don't know. The President doesn't control the Fed. No one does, really.

The problem is that there really is no choice, at this point. A collapse of AIG could mean the collapse of the banking system as we know it, because no other bank wanted to take on responsibility of this. That's also why all the major banks are putting money out to a fund in case one of them collapses. They're all freaked out right now.

Mr. Flopnuts

09-16-2008, 11:16 PM

We are seriously being raped in our collective assholes.

jAZ

09-16-2008, 11:38 PM

The problem is that there really is no choice, at this point. A collapse of AIG could mean the collapse of the banking system as we know it, because no other bank wanted to take on responsibility of this. That's also why all the major banks are putting money out to a fund in case one of them collapses. They're all freaked out right now.
Agreed.

It's the Fed doing it. The previous bailouts had to go through Congress via a bill (remember, the President does not make policy). This time, it was the Fed doing it. Now, whether they had to borrow the money from the Treasury to do that, I don't know. The President doesn't control the Fed. No one does, really.
For the government to take an equity position, there was a decision somewhere in the executive branch that Bush had to authorize. The Fed doesn't own those shares of AIG.

I might be wrong, but I don't think so, and to this point no one has explained how I might be wrong.

alnorth

09-16-2008, 11:46 PM

Your criticism would make more sense if prominent Democrat Senators hadnt been calling for the bailout, and if it didnt make complete and total sense to begin with.

Between Lehman Bros, Bear Stearns, and AIG, IMO this was the ONLY case where the bailout makes sense. The world doesnt end if an I-bank goes down. AIG has their tentacles into everything and insured hundreds of billions worth of these mortgage securities. AIG going down would suddenly yank the insurance that all the more prudent banks were counting on and directly lead to the failure of banks and financial institutions all over the world. Total chaos, worldwide recession guaranteed.

The cost? Not much really. AIG has the assets to back up their debts, they simply needed a few months to free up cash. This really isnt even much of a bailout, its a short-term loan at 11% interest that AIG should be able to pay back in full by the end of the year, maybe 2010 at the latest. The taxpayers are going to come out of this with a pretty decent profit to blow on entitlement programs. I assume the feds are holding the 80% stake in the company as collateral so there isnt even ANY risk of loss at all for the govt, unlike F&F and Bear Stearns.

jAZ

09-16-2008, 11:50 PM

Your criticism would make more sense if prominent Democrat Senators hadnt been calling for the bailout, and if it didnt make complete and total sense to begin with.

Between Lehman Bros, Bear Stearns, and AIG, IMO this was the ONLY case where the bailout makes sense. The world doesnt end if an I-bank goes down. AIG has their tentacles into everything and insured hundreds of billions worth of these mortgage securities. AIG going down would suddenly yank the insurance that all the more prudent banks were counting on and directly lead to the failure of banks and financial institutions all over the world. Total chaos, worldwide recession guaranteed.

The cost? Not much really. AIG has the assets to back up their debts, they simply needed a few months to free up cash. This really isnt even much of a bailout, its a short-term loan at 11% interest that AIG should be able to pay back in full by the end of the year. I assume the feds are holding the 80% stake in the company as collateral so there isnt even ANY risk of loss at all for the govt, unlike F&F and Bear Stearns.
Unless it's bad reporting, the governement OWNS this company. They got 80% of the company in exchange for a LOAN. That's how little this company was worth.

Their supposed assests are largely garbage.

Silock

09-16-2008, 11:56 PM

For the government to take an equity position, there was a decision somewhere in the executive branch that Bush had to authorize. The Fed doesn't own those shares of AIG.

Not necessarily. The Fed is also comprised of private banks, so who owns what gets a little murky at this point, since details are still so sparse.

Silock

09-16-2008, 11:56 PM

Unless it's bad reporting, the governement OWNS this company. They got 80% of the company in exchange for a LOAN. That's how little this company was worth.

Their supposed assests are largely garbage.

AIG wasn't insolvent, though. They just had a liquidity problem.

jAZ

09-16-2008, 11:57 PM

Not necessarily. The Fed is also comprised of private banks, so who owns what gets a little murky at this point, since details are still so sparse.

Like I said, if it's bad reporting, then... But if it's not, I'm on solid ground in my attributions.

alnorth

09-16-2008, 11:58 PM

Unless it's bad reporting, the governement OWNS this company. They got 80% of the company in exchange for a LOAN. That's how little this company was worth.

Their supposed assests are largely garbage.

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth.

jAZ

09-16-2008, 11:59 PM

AIG wasn't insolvent, though. They just had a liquidity problem.

Tell me what would have happened if this didn't go through and then tell me how you aren't drawing a distiction without a difference here.

jAZ

09-17-2008, 12:02 AM

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth.

Ok, if that's the case then why are they why in the world would the government need to own 80% of the company for only $85B in a LOAN!?

If they have assests that are valuable and only need short-term cash, why can't the private markets buy off all or part of the valueable assets and provide the liquidity they need?

I might be missing something, but I have a hard time see that I'm missing anything.

This deal values the company at something around (or under) $100M. A far cry from the supposed $1T that I've heard bandied about (not just you).

alnorth

09-17-2008, 12:09 AM

Tell me what would have happened if this didn't go through and then tell me how you aren't drawing a distiction without a difference here.

Huge portions of AIG would have survived. By state insurance law, the life and P&C companies need to be seperate from the holding company, so they would have been spun off or aquired somewhere else and their policyholders would have been fine.

The investment arm and holding company would have been screwed, but this isnt just about AIG. In the high-rolling days of buying mortgage backed securities, many companies actually did start to realize they were too big of a gamble. For example, lets say a bank has $500 million of this stuff and they figure they can lose $50 million before they are in trouble. They go to AIG, pay them a healthy premium, and AIG promises to insure that investment with a $50million deductible. Voila, bank is safe and they carry on with their business. AIG is one of the biggest players in this exotic type of insurance at the time and make similar deals all over the world.

Huge once in a century crisis happens, the leveraged I-banks die fast, AIG is suddenly hit with billions of insured losses, rating organizations downgrade them forcing them to put up more collateral. They dont have the money, they file BK.

Suddenly tons of banks have nothing to show for their premium. Maybe someday theyll get something out of bankruptcy, but not until after they are insolvent themselves. FDIC is quickly drained, and runs out of money. Repeat: FDIC is bust. National panic, people yanking money out of banks, chaos, cats and dogs living together, etc. I'm not even thinking about what happens to other companies relying on bond insurance not related to mortgages.

alnorth

09-17-2008, 12:11 AM

If they have assests that are valuable and only need short-term cash, why can't the private markets buy off all or part of the valueable assets and provide the liquidity they need?

How many companies can afford a $85B bailout? AIG is the sort of company you go to to ask them to bail out a smaller company. Who the hell bails out the giant?

jAZ

09-17-2008, 12:20 AM

Huge portions of AIG would have survived. By state insurance law, the life and P&C companies need to be seperate from the holding company, so they would have been spun off or aquired somewhere else and their policyholders would have been fine.

The investment arm and holding company would have been screwed, but this isnt just about AIG. In the high-rolling days of buying mortgage backed securities, many companies actually did start to realize they were too big of a gamble. For example, lets say a bank has $500 million of this stuff and they figure they can lose $50 million before they are in trouble. They go to AIG, pay them a healthy premium, and AIG promises to insure that investment with a $50million deductible. Voila, bank is safe and they carry on with their business. AIG is one of the biggest players in this exotic type of insurance at the time and make similar deals all over the world.

Huge once in a century crisis happens, the leveraged I-banks die fast, AIG is suddenly hit with billions of insured losses, rating organizations downgrade them forcing them to put up more collateral. They dont have the money, they file BK.

Suddenly tons of banks have nothing to show for their premium. Maybe someday theyll get something out of bankruptcy, but not until after they are insolvent themselves. FDIC is quickly drained, and runs out of money. Repeat: FDIC is bust. National panic, people yanking money out of banks, chaos, cats and dogs living together, etc. I'm not even thinking about what happens to other companies relying on bond insurance not related to mortgages.
I agree with everything here, but my points remain.

If large parts of AIG are valuable, they can easily be sold in the private market for the $85B in cash needed. They couldn't pull that off. This deal valued those assests in total at about $100B. That's 10-cents on the dollar. Fire sale.

That tells me that there is a huge piece of this issue that either you are wrong about (and I am right) or that is not being reported publicly (and neither you nor I know it).

Either way, what you are presenting is at best incomplete and at worst is way off base.

jAZ

09-17-2008, 12:25 AM

How many companies can afford a $85B bailout? AIG is the sort of company you go to to ask them to bail out a smaller company. Who the hell bails out the giant?
It's not an $85B bailout if your asseesment is right. It's an $85B purchase of (extrapolating from your assumptions and the news report) something up to $800B worth of quality assets.

No one in the private sector could possible turn that opportunity down.

Too good to be true, is my point.

alnorth

09-17-2008, 12:29 AM

I agree with everything here, but my points remain.

If large parts of AIG are valuable, they can easily be sold in the private market for the $85B in cash needed. They couldn't pull that off. This deal valued those assests in total at about $100B. That's 10-cents on the dollar. Fire sale.

You are simply wrong. Their assets are over a trillion and given a short amount of time they would have raised the money. What we have here is a gambling debt where the guy can sell his house in a few months, but Vinny is at the door threatening to break his knees if he doesnt come up with the money tonight. AIG is not insolvent. Dont take my word for it, this is basically universally-agreed stuff by the financial analysts.

Another problem they have is that the most valuable portions (P&C and Life insurance) by law cant loan out their loss and unearned premium reserves because its needed to support the product. They make enough in profit to repay the debt within a few years, but they had only 1-2 days.

jAZ

09-17-2008, 12:38 AM

You are simply wrong. Their assets are over a trillion and given a short amount of time they would have raised the money. What we have here is a gambling debt where the guy can sell his house in a few months, but Vinny is at the door threatening to break his knees if he doesnt come up with the money tonight. AIG is not insolvent. Dont take my word for it, this is basically universally-agreed stuff by the financial analysts.

Another problem they have is that the most valuable portions (P&C and Life insurance) by law cant loan out their loss and unearned premium reserves because its needed to support the product. They make enough in profit to repay the debt within a few years, but they had only 1-2 days.
Getting me closer to your POV, but I don't see how BofA & ML can put together a deal in a matter of minutes, but AIG can't sell of 10% of it's high quality assets in a few days in the private sector.

Add to that the need for the Gov't to own 80% of AIG at the price of an $85B LOAN (not straight cash).... and it doesn't add up.

Silock

09-17-2008, 12:44 AM

Getting me closer to your POV, but I don't see how BofA & ML can put together a deal in a matter of minutes, but AIG can't sell of 10% of it's high quality assets in a few days in the private sector.

Add to that the need for the Gov't to own 80% of AIG at the price of an $85B LOAN (not straight cash).... and it doesn't add up.

Put it this way:

If they could have done things differently, do you think they would have? I certainly do.

The Fed doesn't want to give them money (at least, not at this point) any more than you or I do. But they simply have no choice. Giving up 79.9% control is a better option than going completely under. Drastic times call for drastic measures.

I'm sure it will become clearer as details begin to emerge. Right now, I think we should all just be thankful that they're not allowing AIG to screw us all. The Fed sure as shit isn't perfect, but this is the right move. There is simply no scenario in the world where AIG collapsing turns out okay.

Scroll down to page 209 to see the list of companies under AIG. This organization is so massive it takes 6 pages to list them all.

tiptap

09-17-2008, 05:50 AM

At this point don't you ask who plays golf or sails or plays tennis together? Or who has a grudge from college? Since so few people are making the decision how objective is the decision. You can justify acting in the market, after all, these companies where all big players but ultimately you had decisions to sacrifice some and save others.

tiptap

09-17-2008, 06:59 AM

I guess we should look at the multiplier effect in the economy. Most economics classes talk about the multiplier when the economy is growing. What is missed is how the multiplier also works to our detriment in a falling economy. In a business cycle there is impetus for the work and resources to actually produce something that has long term staying power. If instead that investment does not match up with what was really needed then in the contracting stage there is no anchored asset that stands firm through the downturn produced during the up swing.

The investments in war and financial instruments are not enduring investments. 1 trillion of the 10 trillion debt came from borrowing China's money and throwing it at Iraq. The Bush admininstrations inability to cut loses and own up to mistakes added to this and McCain's/Graham's penchant to deregulate now has the very consequences that the market was suppose to be mature enough to avoid on its own.

Soupnazi

09-17-2008, 07:10 AM

Ok, if that's the case then why are they why in the world would the government need to own 80% of the company for only $85B in a LOAN!?

If they have assests that are valuable and only need short-term cash, why can't the private markets buy off all or part of the valueable assets and provide the liquidity they need?

I might be missing something, but I have a hard time see that I'm missing anything.

This deal values the company at something around (or under) $100M. A far cry from the supposed $1T that I've heard bandied about (not just you).

Quit trying to opine on topics that you're too dumb to understand. Seriously.

tiptap

09-17-2008, 07:18 AM

And yet the Republican Senator from New Hampshire and the Democratic Senator from Conn. both have the same take the jaz is saying. They are all saying we may have bought assets at a premium in tying the tax payer to spending 85 billion for the company. I am so thankful that the separation between Insurance Co and Wall Street and Bank Mortgages worked out for us so well.

Rooster

09-17-2008, 07:21 AM

Get a life Jaz. :rolleyes:

oldandslow

09-17-2008, 07:38 AM

And yet the Republican Senator from New Hampshire and the Democratic Senator from Conn. both have the same take the jaz is saying. They are all saying we may have bought assets at a premium in tying the tax payer to spending 85 billion for the company. I am so thankful that the separation between Insurance Co and Wall Street and Bank Mortgages worked out for us so well.

tiptap...

Seriously, the Reagan deregulation plan has led to more corporate socialism they most communists could have ever dreamed....

what could be more socialistic than the govt now owning 80% of the complany...Hell, we are going the way of Chavez...

Soupnazi

09-17-2008, 07:38 AM

Honestly, the U.S. taxpayer should be excited about this move. The US government got a hell of a deal here. Not only is AIG going to pay LIBOR + 8.5 for the loans (which are secured by actual assets that have already been marked to market) but the government also gets warrants for equity participation which could payout huge when the stock price eventually recovers.

While I'm not a fan of bail-outs administered at the federal level, this deal is smoking for the US taxpayer. As alnorth already properly pointed out, this is a holdco that needed liquidity now, rather than a conglomerate that is financially insolvent.

oldandslow

09-17-2008, 07:41 AM

Honestly, the U.S. taxpayer should be excited about this move. The US government got a hell of a deal here. Not only is AIG going to pay LIBOR + 8.5 for the loans (which are secured by actual assets that have already been marked to market) but the government also gets warrants for equity participation which could payout huge when the stock price eventually recovers.

While I'm not a fan of bail-outs administered at the federal level, this deal is smoking for the US taxpayer. As alnorth already properly pointed out, this is a holdco that needed liquidity now, rather than a conglomerate that is financially insolvent.

Good Lord...You are defending corporate socialism of a financial institution...aren't you one of the folks who used to be on here screaming about privatizing social security????

Spin, much.

Chiefnj2

09-17-2008, 07:44 AM

What happened to capitalism?

oldandslow

09-17-2008, 07:45 AM

What happened to capitalism?

The capitalists killed it.

Soupnazi

09-17-2008, 07:46 AM

Good Lord...You are defending corporate socialism of a financial institution...aren't you one of the folks who used to be on here screaming about privatizing social security????

Spin, much.

Yep, and generally speaking, I hate the corporate bailout by the feds. Privatizing social security is another issue all together, but I'm sure you enjoy getting your negative return on investment.

In this case, the financial damage caused by AIG's collapse would've been catastrophic. The feds negotiated a deal that got them a big payout on the loans, securitization of the loans by underlying assets, and a huge equity stake for athe taxpayer.

It's not spin, it's education. I understand why you wouldn't get it.

oldandslow

09-17-2008, 07:53 AM

Yep, and generally speaking, I hate the corporate bailout by the feds. Privatizing social security is another issue all together, but I'm sure you enjoy getting your negative return on investment.

In this case, the financial damage caused by AIG's collapse would've been catastrophic. The feds negotiated a deal that got them a big payout on the loans, securitization of the loans by underlying assets, and a huge equity stake for athe taxpayer.

It's not spin, it's education. I understand why you wouldn't get it.

It's socializing a private company - and you call that a good move...

and then you sit here telling me that privatizing SS would also be a good move...especially when the Stock Market has lost 30% over the past 4 or 5 years.

Son, you are the one that needs to go back to school.

Soupnazi

09-17-2008, 08:04 AM

It's socializing a private company - and you call that a good move...

and then you sit here telling me that privatizing SS would also be a good move...especially when the Stock Market has lost 30% over the past 4 or 5 years.

Son, you are the one that needs to go back to school.

Without spending all day proving that you're a moron, a move to privatization of SS would allow me to invest in US govt bonds, that are currently paying roughly 4%, which blows away my likely payout in the current system of 0 to negative 1%. Furthermore, it allows the government to see me their debt rather than the Chinese. Geez, what a bad idea.

Furthermore, once the government sells the equity stake, AIG will no longer be privatized. I'm sure you're smarter than all of this, though.

***SPRAYER

09-17-2008, 08:07 AM

He's the President. In theory, none of this happens without his authorization.

Bush to be indicted within 2 weeks.

Amnorix

09-17-2008, 08:08 AM

We are seriously being raped in our collective assholes.

Actually, no. The interest rate on the loan is 11.3% at today's rates (it's LIBOR +8.5, which is very high), and given the size of AIG's assets, we'll likely get all of it paid and the taxpayers should actually turn a profit on this transaction.

Amnorix

09-17-2008, 08:09 AM

Unless it's bad reporting, the governement OWNS this company. They got 80% of the company in exchange for a LOAN. That's how little this company was worth.

Their supposed assests are largely garbage.

$1.1 TRILLION of garbage?

Amnorix

09-17-2008, 08:10 AM

AIG wasn't insolvent, though. They just had a liquidity problem.

Just to go hypertechnical lawyerly on your, one part of the standard solvency test is "able to pay debts as they come due". That's where AIG had problems.

But yes, they met other parts of the solvency test. But still, failing ANY part of the solvency test would render them insolvent, to be technical.

StcChief

09-17-2008, 08:10 AM

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth. but if a Democrat had done it... He would be a hero.

Amnorix

09-17-2008, 08:11 AM

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth.

Be that as it may, it sounds like it's likely to be chopped up and sold in pieces. Though I do agree that the Fed should get all their money back.

Amnorix

09-17-2008, 08:12 AM

I agree with everything here, but my points remain.

If large parts of AIG are valuable, they can easily be sold in the private market for the $85B in cash needed. They couldn't pull that off. This deal valued those assests in total at about $100B. That's 10-cents on the dollar. Fire sale.

That tells me that there is a huge piece of this issue that either you are wrong about (and I am right) or that is not being reported publicly (and neither you nor I know it).

Either way, what you are presenting is at best incomplete and at worst is way off base.

You fail to understand how difficult it is to raise 85 ***BILLION*** in private markets, whether by debt or equity sale, on a very short term basis.

Amnorix

09-17-2008, 08:16 AM

Getting me closer to your POV, but I don't see how BofA & ML can put together a deal in a matter of minutes, but AIG can't sell of 10% of it's high quality assets in a few days in the private sector.

Add to that the need for the Gov't to own 80% of AIG at the price of an $85B LOAN (not straight cash).... and it doesn't add up.

BofA is buying Merrill in an all stock deal (NO CASH), and that alone was enough to calm the counterparties, etc.

No bank was able ot swallow putting up multiple tens of billions in CASH, NOW, that AIG needed to meet its short term liquidity issue. The Fed asked the two biggest, baddest bad boys on Wall Street -- Goldman and Morgan STanley, to get $70BB cobbled together somehow to help fund AIG through the crisis, and they couldn't get it done.

Scroll down to page 209 to see the list of companies under AIG. This organization is so massive it takes 6 pages to list them all.

As you no doubt know, it's the largest insurer in the world, with as you say $1.1 Trillion in assets (probably soemwhat less now given subprime mortgage collateral, etc.), with businesses in 130 contries and over a hundred million customers.

Its bankruptcy would likely have heralded in the Great Depression II.

Amnorix

09-17-2008, 08:19 AM

I guess we should look at the multiplier effect in the economy. Most economics classes talk about the multiplier when the economy is growing. What is missed is how the multiplier also works to our detriment in a falling economy. In a business cycle there is impetus for the work and resources to actually produce something that has long term staying power. If instead that investment does not match up with what was really needed then in the contracting stage there is no anchored asset that stands firm through the downturn produced during the up swing.

The investments in war and financial instruments are not enduring investments. 1 trillion of the 10 trillion debt came from borrowing China's money and throwing it at Iraq. The Bush admininstrations inability to cut loses and own up to mistakes added to this and McCain's/Graham's penchant to deregulate now has the very consequences that the market was suppose to be mature enough to avoid on its own.

Yes. Leverage is good when things are growing, but it quickly turns into the noose around your neck when things go the other way.

Amnorix

09-17-2008, 08:21 AM

And yet the Republican Senator from New Hampshire and the Democratic Senator from Conn. both have the same take the jaz is saying. They are all saying we may have bought assets at a premium in tying the tax payer to spending 85 billion for the company. I am so thankful that the separation between Insurance Co and Wall Street and Bank Mortgages worked out for us so well.

I was in favor of the reform package at the time, but now I'm seriously reconsidering that, to say the least.

The thing is -- no other country has these Chinese Walls (at least not that I know of), and Citicorp and other mammoth banks could not compete with the mammoth Japanese banks, etc. in the world stage. Or, at least, so I thought at the time. But now the problem is whether we would do more damage restoring those walls.

banyon

09-17-2008, 08:24 AM

Without spending all day proving that you're a moron, a move to privatization of SS would allow me to invest in US govt bonds, that are currently paying roughly 4%, which blows away my likely payout in the current system of 0 to negative 1%. Furthermore, it allows the government to see me their debt rather than the Chinese. Geez, what a bad idea.

Furthermore, once the government sells the equity stake, AIG will no longer be privatized. I'm sure you're smarter than all of this, though.

I assume by "privatized" you mean "socialized" here.

In any event your hypocrisy here is well observed by oldandslow. So your proposal is that everyone buy government securities with their money they are currently putting toward SSA retirement? Are we supposed to borrow a s***-ton more money to accomplish this? Or mystically buy our debt back from the Chinese and re-issue the notes? What would the by-far-largest increase in ownership of government bonds do to the interest rates they were offered at you think?

Even after all of this, the point of the program is to act as social insurance against ruin and not as a glorified lottery. Just like people's pensions are getting wiped out by mergers and corporate malfeasance and ineptitude, your private scheme would have the same weaknesses and therefore fail at the primary purpose of SSA: to provide a minimal level of subsistence for the elderly so that people can retire with dignity and not in extreme poverty.

The hypocrisy of course is represented by your insistence that retirees take giant risks with their livelihood, while seasoned investors who knowing took risky bets get bailed out by taxpayers. Atrocious, really.

banyon

09-17-2008, 08:26 AM

You fail to understand how difficult it is to raise 85 ***BILLION*** in private markets, whether by debt or equity sale, on a very short term basis.

I understand that it's generally because a shell was removed from the shell game that is the practice of fractional reserve banking.

Amnorix

09-17-2008, 08:43 AM

Hey Banyon -- is that quote of Dick Cheney's in your sig for real? That's insane. Under what circumstance can massive wealth transfer from the US/Western Europe to the Middle East, Russia and Venezuela be anything but BAD??

Can you post a link?

Amnorix

09-17-2008, 08:44 AM

I understand that it's generally because a shell was removed from the shell game that is the practice of fractional reserve banking.

A system that has tremendous increased the wealth of the entire Western world over the past 100'ish years.

Garcia Bronco

09-17-2008, 08:45 AM

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth.

dude doesn't understand any of this stuff. If AIG closed it's doors millions would be out of work because the businesses themselves would be unable to operate without insurance.

Amnorix

09-17-2008, 08:46 AM

The hypocrisy of course is represented by your insistence that retirees take giant risks with their livelihood, while seasoned investors who knowing took risky bets get bailed out by taxpayers. Atrocious, really.

I agree with your other points, but not sure if you're referring to AIG here, in which case I woudl disagree in that nearly all AIG investors are getting murdered, bailout or no.

Soupnazi

09-17-2008, 08:46 AM

I assume by "privatized" you mean "socialized" here.

In any event your hypocrisy here is well observed by oldandslow. So your proposal is that everyone buy government securities with their money they are currently putting toward SSA retirement? Are we supposed to borrow a s***-ton more money to accomplish this? Or mystically buy our debt back from the Chinese and re-issue the notes? What would the by-far-largest increase in ownership of government bonds do to the interest rates they were offered at you think?

Even after all of this, the point of the program is to act as social insurance against ruin and not as a glorified lottery. Just like people's pensions are getting wiped out by mergers and corporate malfeasance and ineptitude, your private scheme would have the same weaknesses and therefore fail at the primary purpose of SSA: to provide a minimal level of subsistence for the elderly so that people can retire with dignity and not in extreme poverty.

The hypocrisy of course is represented by your insistence that retirees take giant risks with their livelihood, while seasoned investors who knowing took risky bets get bailed out by taxpayers. Atrocious, really.

Your program is a parachute full of holes. Nothing short of a huge tax increase or another baby boom 3 times the one of the late 40's will fix the current system.

Hypocrisy? How 'bout the hypocrisy of touting that privatization is a bad idea due to performance of the stock market, while trumpeting the relative "safety" of a system that is so full of holes that it is inevitably insolvent.

Amnorix

09-17-2008, 08:46 AM

dude doesn't understand any of this stuff. If AIG closed it's doors millions would be out of work because the businesses themselves would be unable to operate without insurance.

:spock:

Amnorix

09-17-2008, 08:48 AM

Your program is a parachute full of holes. Nothing short of a huge tax increase or another baby boom 3 times the one of the late 40's will fix the current system.

Hypocrisy? How 'bout the hypocrisy of touting that privatization is a bad idea due to performance of the stock market, while trumpeting the relative "safety" of a system that is so full of holes that it is inevitably insolvent.

Your point is valid, but so is Banyon's.

banyon

09-17-2008, 08:51 AM

Hey Banyon -- is that quote of Dick Cheney's in your sig for real? That's insane. Under what circumstance can massive wealth transfer from the US/Western Europe to the Middle East, Russia and Venezuela be anything but BAD??

A system that has tremendous increased the wealth of the entire Western world over the past 100'ish years.

True, but over the last 30, it's increasingly served to increase the wealth of just a small subset of the Western World.

***SPRAYER

09-17-2008, 08:52 AM

Charlie Rangel, Chris Dodd, and Barney Frank are calling for a special hearing.

Cave Johnson

09-17-2008, 08:55 AM

Hey Banyon -- is that quote of Dick Cheney's in your sig for real? That's insane. Under what circumstance can massive wealth transfer from the US/Western Europe to the Middle East, Russia and Venezuela be anything but BAD??

Can you post a link?

It's real, but not that spectaular. The context is far less damning than the actual quote. Even Cheney's not that much of a dick.

Your program is a parachute full of holes. Nothing short of a huge tax increase or another baby boom 3 times the one of the late 40's will fix the current system.

This is just flat wrong. There are several solutions that would fix the problem rather easily, the main one being raising the exemption limit, others being retirement age or allowing a portion to be privately invested, etc. When you're looking into 40-50 year windows of time, small changes will make big long term differences.

Hypocrisy? How 'bout the hypocrisy of touting that privatization is a bad idea due to performance of the stock market, while trumpeting the relative "safety" of a system that is so full of holes that it is inevitably insolvent.

Again, you seem to fundamentally misunderstand the reasons that SSA was enacted originally and what consequences would develop from your alternative. And since I disagree with you about the solvency aspect, the rest of your criticism would be affected as well.

Amnorix

09-17-2008, 09:03 AM

This is just flat wrong. There are several solutions that would fix the problem rather easily, the main one being raising the exemption limit, others being retirement age or allowing a portion to be privately invested, etc. When you're looking into 40-50 year windows of time, small changes will make big long term differences.

While I agree they are fixes, they are often in the nature of band-aids on a sucking chest wound. Sooner or later we must meet the maker on this. I don't have a good answer for it, however. Social Security must be retained, but the demographics don't line up well in supprt of it.

banyon

09-17-2008, 09:22 AM

While I agree they are fixes, they are often in the nature of band-aids on a sucking chest wound. Sooner or later we must meet the maker on this. I don't have a good answer for it, however. Social Security must be retained, but the demographics don't line up well in supprt of it.

While I appreciate your metaphor and do not mean to imply that the problem isn't very serious, most of the numbers I have seen show that the solutions I have mentioned, particularly in concert, would go a long way towards ensuring future solvency.

Stinger

09-17-2008, 09:24 AM

Charlie Rangel, Chris Dodd, and Barney Frank are calling for a special hearing.

If this is true please oh please let Rangel talk about the tax burden. That would wonderfully Ironic.

Donger

09-17-2008, 09:25 AM

jAZ Hates Big Bush.

Garcia Bronco

09-17-2008, 09:29 AM

:spock:

What don't you understand?

Mr. Kotter

09-17-2008, 09:34 AM

The Democratic Congress could stop this, you know.

Amnorix

09-17-2008, 09:36 AM

What don't you understand?

Your statement is rather ironic. I'll leave it at that.

chasedude

09-17-2008, 09:38 AM

Sure ad more to the deficit, now my grand children's grand children will be paying for our mistakes

patteeu

09-17-2008, 09:43 AM

Hey Banyon -- is that quote of Dick Cheney's in your sig for real? That's insane. Under what circumstance can massive wealth transfer from the US/Western Europe to the Middle East, Russia and Venezuela be anything but BAD??

Can you post a link?

Obama seems to share Cheney's sentiment when he talks about how he isn't against high gas prices, he just wishes that the increase would have been more gradual.

If oil prices are too low, domestic oil companies struggle to get by and the incentives to improve efficiency in oil consumption and to develop alternative energy sources go away.

Besides, at the time Cheney said that, we weren't nearly as dependent on foreign oil as we are today and we weren't faced with a mature jihad against our country originating in that region. The price of a barrel of oil in 1986, when Cheney made this comment, was approximately $20.

Garcia Bronco

09-17-2008, 09:45 AM

Your statement is rather ironic. I'll leave it at that.

There is nothing ironic about it. If they shut down then the business they insure would not be able to operate.

Chief Henry

09-17-2008, 09:58 AM

There is nothing ironic about it. If they shut down then the business they insure would not be able to operate.

I bought a few also, but I am expecting to lose it. But hey, it's only 100 beans.

Amnorix

09-17-2008, 10:07 AM

There is nothing ironic about it. If they shut down then the business they insure would not be able to operate.

No, they would go to a different insurance company and get insurance. AIG may be the biggest, but they are hardly the ONLY insurance company.

Plus, LOTS of businesses would operate without insurance. Would they be happy? No, but they wouldn't shut down certainly. It's not like they're the electric company...

Garcia Bronco

09-17-2008, 10:10 AM

No, they would go to a different insurance company and get insurance. AIG may be the biggest, but they are hardly the ONLY insurance company.

Plus, LOTS of businesses would operate without insurance. Would they be happy? No, but they wouldn't shut down certainly. It's not like they're the electric company...

It could take weeks to get said insurance because risk analysis needs to be performed. Sure they can take their business elsewhere, but the company on the other end is going to do it's research. I think you underestimate the role of insurance in business and neglect the laws that mandate insurance.

Amnorix

09-17-2008, 11:28 AM

It could take weeks to get said insurance because risk analysis needs to be performed. Sure they can take their business elsewhere, but the company on the other end is going to do it's research. I think you underestimate the role of insurance in business and neglect the laws that mandate insurance.

There are certain types of insurance mandated by law, I believe (worker's comp etc.?) but I know relatively little about them. Generally business insurance is usually mandated by loan agreements and the like.

And while it would take some weeks ot switch coverage, it's also true that AIG would not shut down immediately even in the event of a bankruptcy filing, so your post is still inaccurate.

Garcia Bronco

09-17-2008, 11:30 AM

There are certain types of insurance mandated by law, I believe (worker's comp etc.?) but I know relatively little about them. Generally business insurance is usually mandated by loan agreements and the like.

And while it would take some weeks ot switch coverage, it's also true that AIG would not shut down immediately even in the event of a bankruptcy filing, so your post is still inaccurate.

The money has to be there to cover the claim. Pure and simple.

Cannibal

09-17-2008, 11:47 AM

Your criticism would make more sense if prominent Democrat Senators hadnt been calling for the bailout, and if it didnt make complete and total sense to begin with.

Between Lehman Bros, Bear Stearns, and AIG, IMO this was the ONLY case where the bailout makes sense. The world doesnt end if an I-bank goes down. AIG has their tentacles into everything and insured hundreds of billions worth of these mortgage securities. AIG going down would suddenly yank the insurance that all the more prudent banks were counting on and directly lead to the failure of banks and financial institutions all over the world. Total chaos, worldwide recession guaranteed.

The cost? Not much really. AIG has the assets to back up their debts, they simply needed a few months to free up cash. This really isnt even much of a bailout, its a short-term loan at 11% interest that AIG should be able to pay back in full by the end of the year, maybe 2010 at the latest. The taxpayers are going to come out of this with a pretty decent profit to blow on entitlement programs. I assume the feds are holding the 80% stake in the company as collateral so there isnt even ANY risk of loss at all for the govt, unlike F&F and Bear Stearns.

If what you say is true, I don't feel nearly as bad about it. I guess I need to look it up for myself :)

Amnorix

09-17-2008, 12:35 PM

The money has to be there to cover the claim. Pure and simple.

Yes, but bankrupt does not mean penniless.

Stewie

09-17-2008, 12:42 PM

I have a sneaky suspicion that AIG has their hands in OTC derivatives in a big way. I know I've talked about OTCDs ad-nauseum, but that's the only reason I can think of that the Fed/Treasury would step in and save a non-banking entity. AIG must be counter-party to some big players with big dollars that would go bust if AIG were to fail. That's the problem with OTCDs. They are unregulated with no recourse should a counter party fail AND there is no clearinghouse to guarantee performance. It's basically a casino investment that has become popular because it meant big money. Now it means big problems.

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth.IOW, it is like a bridge loan to get through the day, kind of like in the movie, "It's a wonderful life, when they got through the day and had like 2 bucks left in their till.

The goverment could end up making money on this deal.

WilliamTheIrish

09-17-2008, 03:42 PM

I have a sneaky suspicion that AIG has their hands in OTC derivatives in a big way. I know I've talked about OTCDs ad-nauseum, but that's the only reason I can think of that the Fed/Treasury would step in and save a non-banking entity. AIG must be counter-party to some big players with big dollars that would go bust if AIG were to fail. That's the problem with OTCDs. They are unregulated with no recourse should a counter party fail AND there is no clearinghouse to guarantee performance. It's basically a casino investment that has become popular because it meant big money. Now it means big problems.

Stewie,

I completely agree. Since you began talking about these derivatives several months back, I've made it a point to learn all I can about them and involve myself more in my portfolio.

I have a found a pretty smart individual who looks after my money and has taken the time to discuss with me the recent banking collapse. He assessment was just like yours. He feels they are neck deep in OTCD's.

BTW, have you heard or read more about the mints not making gold coins recently? I was wondering what became of that story.

Stewie

09-17-2008, 03:47 PM

You simply dont know what you are talking about. This isnt a high-wire investment bank made up only of a pile of heavily-leveraged cash and high-rolling brokers, AIG is by far the largest insurance company in the world, employing over 100,000 people. This is a monster organization.

AIG's assets are over a trillion dollars, they just arent liquid enough to meet their unexpected short-term liabilities. They earn enough in pure profit from their life, P&C, and bond insurance policies to pay back this loan in 2 or 3 years without liquidating anything. The mortgage security insurance they got into accounts for a small portion of their net worth.

I guess I missed this gem.

AIG is first and foremost an insurance company. They, like most insurance companies, use the carry on their product to make money elsewhere. It has become quite apparent to me (and the Fed/Treasury) that they are in deep shit. They were suckered into the slimy derivative game and they lost their ass. Assets don't matter when you're $90 billion in the hole (including those "valuable" assets) and that's with creative accounting, I'm sure. That's why no one would touch AIG with a 10-foot pole, and rightly so.

Amnorix

09-17-2008, 03:51 PM

I guess I missed this gem.

AIG is first and foremost an insurance company. They, like most insurance companies, use the carry on their product to make money elsewhere. It has become quite apparent to me (and the Fed/Treasury) that they are in deep shit. They were suckered into the slimy derivative game and they lost their ass. Assets don't matter when you're $90 billion in the hole (including those "valuable" assets) and that's with creative accounting, I'm sure. That's why no one would touch AIG with a 10-foot pole, and rightly so.

You have any kind of link or support, or is this just direct from your anal orifice? :)

Stewie

09-17-2008, 03:52 PM

BTW, have you heard or read more about the mints not making gold coins recently? I was wondering what became of that story.

The last I read they were going to start minting again on 9/4. I haven't really followed that story other than hearing complaints from people wanting 1 oz. Gold Eagles in August. The U.S. Mint was saying they halted production due to high demand. That really makes no sense to me.

Stewie

09-17-2008, 03:53 PM

You have any kind of link or support, or is this just direct from your anal orifice? :)

Do you have another explanation why they needed $85 billion, PRONTO?!

banyon

09-21-2008, 09:37 AM

I didn't realize McCain managed to get on both sides of this issue until I heard it on CNN this morning:

NBC’s Today Show before the decision yesterday, Sen. John McCain (R-AZ) said that “we cannot have the taxpayers bail out AIG or anybody else”:

No, I do not believe that the American taxpayer should be on the hook for AIG and I’m glad that the Secretary Paulson has apparently taken the same line.

Interviewed on ABC this morning, however, McCain suggested that he supported the bail out:

I didn’t want to do that. And I don’t think anybody I know wanted to do that. But there are literally millions of people whose retirement, whose investment, whose insurance were at risk here. They were going to have their lives destroyed because of the greed and excess and corruption.